Whispered in the corners of all real estate, mortgage, and title offices, is the idea of "walking away" from your home. It's an ugly idea, and no one ever wanted to be in such a situation that makes the "walking away" look like a good idea, but here we are. What has clearly become the worst housing market since perhaps the Great Depression, record numbers of foreclosures and short sales have pressed the housing prices downward. Granted some areas have felt less impact than others, but for those families and individuals who are faced with foreclosure, the impact is immense.
Let's break it down: Many Homeowners owe more money to the mortgage bank than what the home is worth. In Texas, it is common to owe just a bit too much once the real estate commissions and closing costs have been calculated, that offers have to be rejected, only for the home to be foreclosed and sold for even less money. Recently, I had an offer on a home that was $5000 under what he need to break even at a sale price of $129,000. We couldn't work it out, the bank refused to negotiate, and eight months later, the home sold for $102,000. Nobody wins except the more recent buyer. The Seller did everything he could to make it work, but he had no money left and just couldn't make it happen. With late fees and later, attorney fees added on, he now has a very large judgment against his name. And this is after trying to work it out with the bank.
So, the discussion comes to this point: If you see that in the very near future, paying the payment on a home that you owe more than it is worth will become impossible, and there is no way you can sell it, should you stop making the payment now? To try to negotiate with the bank now seems to make sense, but the mortgage companies have made it clear, they will not negotiate a short sale if you are current on your payments. In order to get out of your home on a short sale (a negotiate pay-off that is less than what you owe) you have to be in financial straights. You have to be behind on your payments, and be able to prove that you simply have no money. If you just stop making your payments, but you have money in the bank, they will not negotiate with you. I understand the banks do not want to be taken advantage of, but the system they have come up with is only making matters worse. To be able to work with them, you have to keep making your payments until you are flat broke... then they will work with you... I am not so sure this helps anyone.
Since the bank won't negotiate with you, you have very few options. You can try a friendly foreclosure, which is when you call them and tell them you are sending them the keys and that you are moving out. They will try to get you to do a "loan modification" which frankly doesn't really help anyone. You will still owe more than it is worth, and essentially will owe even more once it is all over. Trying to rent it out will more than likely only prolong the inevitable. Hitting the lottery is your best bet, but that is almost as big a long shot as the bank forgiving your debt.
"Walking Away", unfortunately, is beginning to look like a viable option. I am not saying anyone should do this, but I think it is important to be honest about the facts and the implications thereof. The premise is this: you know you cannot continue making payments for much longer; you know you cannot sell the home for what you owe, you know you will have to move sooner or later, and sooner would be better because your credit isn't destroyed yet, and you still have some money in the bank. If you rented a home now for less money per month to cut your expenses and walked away from the mortgage, you would be able to keep feeding your family, keep your vehicles, your job, and most of your dignity... You will definitely lose about 350 points on your credit score, and lose your ability to borrow any money for the next 3-5 years, maybe longer, and you will likely end up with a judgment for the difference between what you owed and what they sold it for. Add to this that the bank would begin foreclosure sooner, so there would be less late fees, attorney fees, etc... which could make that judgment lower than if you wait until your world falls completely apart.
The bottom line is that there are no good choices. And it is no ones fault. The housing market crashed. Yes, I have read the books and the blogs about how the banker's greed, or the government's greed, or the Democrats or the Republicans did this or that... I have heard, "Well, if the banks wouldn't have loaned the money to them, they wouldn't be in foreclosure!" Nobody made anyone borrow money... no one forced a pen into anybody's hand. The subprime loans were horrible, the secondary mortgage market was inflated, and prices of homes were skyrocketing! Poop happens... That's the beauty, and the bitter, of our free market system. So, here we are. What counts is what we do today, and tomorrow.
That's my two cents... Let me know what you think.
